In July 2021 major floods hit parts of western Germany, eastern Belgium, and the Netherlands. To date over 180 people are known to have died and hundreds are still missing. It is impossible to come up with accurate insured loss estimates so soon after an event, but the potential for the insured loss to reach up to $6 billion as reported by the Insurance Insider seems credible. The Swiss Re Institute reports that the largest insured flood loss event in Europe since 1970 occurred in 2013, $4 billion rebased to 2021 values. Managing and reducing the flood risk going forward requires not only actions by governments but also improved data, tools and technology.
Why has this happened?
The floods were the result of intense rainfall over a 48-hour period. According to McKenzie Intelligence Services, precipitation exceeded 148 litres of rain per square metre over areas that usually only experience 80 litres in a month.
The European Flood Awareness System (EFAS) was set up in 2002 after severe floods across central Europe. Flood alerts were sent out last week, but they did not reach everyone. Some people did not know that the floods were coming, or how to protect themselves and their property. An EFAS representative has subsequently stated that these floods have exposed “breaks in the chain”.
Individual weather events, such as these floods, cannot statistically be associated with climate change, but as the climate is warming, the frequency and severity of extreme weather events is increasing. During the recent InsTech London event with Fathom and Nasdaq we discussed the practical implications of how climate change is affecting flooding, and what this means for both insurers and modellers.
Many commentators are quick to seek press coverage by making estimates about the losses from catastrophic events. In practice, until the damage can be properly surveyed, and insurers and reinsurers start releasing their own loss estimates, some caution needs to be applied when reviewing what makes it into the press. Most of the established modelling companies, for example, will wait a few days or even weeks before releasing estimates, and even then, they will usually provide a range. We contacted several of the modellers to see if they were prepared to offer estimates at this time, but rightly, many declined to put a specific figure on the floods at this point. Furthermore, economic losses which address the entire cost of the damage will often be far greater than insurance pay-outs.
“As the event unfolds it is uncertain if the record economic damage from the 2002 and 2013 floods will be matched, but it would appear to be a more damaging event than the 2016 floods.” - CoreLogic
JBA Risk Management’s recent report with the World Bank and European Commission indicated that between 1980 and 2020, natural disasters affected nearly 50 million people in the European Union and caused economic losses of roughly $14 billion a year. In 2002, when two major flood events took place, the total economic losses were estimated at over $20 billion, but only 15-20% of these losses were insured. If the estimate quoted in the Insurer Insider of up to $6 billion proves accurate for the July 2021 floods, then this is likely to be the largest European flood insurer loss ever.
In Germany, flood coverage is relatively high in states which were previously covered by state-owned insurers offering multi-peril coverage prior to unification and privatization. Unfortunately flood coverage is relatively low in the former western Germany states, which were impacted by the floods. Consequently, the German insurance industry association GDV estimates that only 45% of buildings are insured against floods and heavy rain. In contrast, in the United Kingdom approximately 95% of homeowners have flood insurance.
In 2002, the low penetration of flood insurance resulted in governments incurring most of the repair costs. Of insurers in Germany, Allianz was the largest bearer of losses with costs of $825 million. As a result of this event, premiums across the affected countries rose by up to 30%. Increases in premiums because of last week’s floods are also likely.
The role of data and technology in reducing and managing flood risk
We identified 22 companies offering risk assessment for flood loss around the world in our Location Intelligence report released in April this year. Flood modelling approaches vary, as does the level of resolution of the modelling. RMS, AIR (a Verisk company), KatRisk and Ambiental aim to model the full water cycle. JBA Risk Management and Fathom take a statistical approach, creating what is known as the hydrological model. Many of these modellers are starting to enhance their models to address future changes in climate risk.
For near real-time data, ICEYE provides flood depth data at the building level within 24 hours of a flood’s peak via its satellite constellation. McKenzie Intelligence Services processes satellite imagery and other data sources such as drones and on the ground, “human intelligence” with machine-learning algorithms. The company can provide data at one-metre resolution anywhere in the world. Companies that focus specifically on providing insurers with data through a single platform include Addresscloud, WhenFresh and Gamma Location Intelligence.
Innovation in the flood insurance space is increasing. For example interest in in parametric insurance continues to grow. FloodFlash installs sensors to enable parametric triggers that provide instant automated pay-outs. Previsico is providing insurers with flood warnings for individual streets that can be used to alert policyholders with far greater accuracy than the generic warnings from the Environmental Agency data.
Every flood event that causes loss of life is a tragedy. It is tempting to blame climate change for the catastrophe, but that does not provide answers for how to manage this growing risk. We believe there are five main areas that need to be addressed:
- A continued focus on creating resilience to properties from flood losses by recognizing that floods do occur, and physical protection is the responsibility of both the building owner and local government.
- Insurance has a vital role to play. It offers payment after a loss and can create incentives to improve the resilience of buildings, but not all properties can be comprehensively insured for a full indemnity payout. Parametric insurance and other innovative insurance products partial payment with lower transactional costs for properties that may otherwise be considered uninsurable.
- The introduction of climate risk stress tests such as those recently announced by the Bank of England are just the most recent in what is going to be an increasing series of regulatory reporting requirements as noted by Matthew in his latest Linkedin article. Such actions by regulators are likely to increase the awareness and measurement of flood risk around the world.
- There is a major opportunity for more tools, analytics, and data to help property owners, insurance customers, insurers and many others improve their understanding of the flood peril.
- Central government can provide interim solutions to help everyone manage the risk, and gain the necessary protections, whilst transitioning to a more resilient and commercial insurance solution. UK Government backed Flood Re has been successful in supporting the insurance industry to provide an insurance backstop for residential homeowners. In addition, Flood Re is structured to penalize those that choose to build new properties in known flood prone areas.
This article was co-authored by Matthew Grant, partner at InsTech London and Ali Smedley, the editor of InsTech London’s monthly newsletter Flood Focus.
You can sign up for free to the Flood Focus newsletter here.